mic Listen to the podcast:

Lego, the 84-year-old Danish toymaker best known for its interlocking bricks that let kids and adults build their own creations, is now making is strongest move in years to secure a place in the world of online video gaming. It plans to launch Lego Worlds, a new video game, on February 21, 2017. (The game has been in beta since June 2015.)

For a toy company trying to grow its non-brick business, Lego Worlds is one among several forays that include theme parks, movies, indoor playgrounds and experiments with digital technology. Lego would benefit from its outsourced development model for Lego Worlds, and its other ventures in driving sales of its toys, but its movies would prove most lucrative, predicted Wharton practice professor of operations and information management David Robertson, who is co-author of Brick by Brick: How LEGO Rewrote the Rules of Innovation and Conquered the Global Toy Industry.

Learning from past missteps where it took the entire financial risk, Lego this time has outsourced the development for Lego Worlds, while retaining creative control and a share of profits. It has also designed it for single players, avoiding some of the perils associated with online multiplayer games. Its development partner for Lego Worlds is London-based TT Games Publishing, whose cofounder and managing director Tom Stone is a former Lego designer. Warner Bros. bought TT Games in 2007 in order to gain a share in the video gaming industry.

Lego Worlds is the latest among other diversifications in recent years such as the Lego Movie series including Star Wars and Batman franchises, TV shows, theme parks and other merchandise. Those represent a bounce-back from tough days Lego saw in 2003-2004, when it almost went bankrupt under the weight of wrong calls, especially a move to run Lego theme parks.

Stories Power the Bricks

“Lego realized that if all it offered were the bricks, then anybody could make those bricks. The patents had expired in the 1980s,” Robertson said. “It was really [about] the stories that animated those bricks. If you could tell the story and get kids involved with the story, then you make the bricks irresistible.” Robertson analyzed Lego’s business strategy on the Knowledge@Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

With Lego Worlds, the $5.4 billion Lego Group is converting a potential threat from online games into a business opportunity. It is taking its bricks and the stories that power them to the internet to grow its business, Robertson noted.

“If you could tell the story and get kids involved with the story, then you make the bricks irresistible.” –David Robertson

Lego Worlds is not the company’s first attempt to get a foothold in online gaming. Robertson recalled that in 1994, Lego backed an inventor’s idea to create 3-D environments for its products. It invested about $100 million in the venture, but shut it down five years later. “They basically chose the wrong geometry,” he said. “If you choose the fundamental math wrong, then everything on top of that has to be redone.”

Lego made its next big bet in online gaming a decade later, in 2005, when it selected NetDevil, a game developer in Louisville, Colo. The idea was to create a multiplayer online gaming world. Learning from its earlier foray into this space, this time around Lego decided to mostly outsource the development to NetDevil, but invested $30 million in the venture. The partnership resulted in a commercial launch of Lego Universe, a 3-D construction game for kids. But that, too, failed and didn’t last beyond 14-15 months, leading to Lego buying NetDevil and closing it down in 2011, said Robertson.

Knowledge@Wharton High School

Friend and Foe

Lego Worlds will compete with Minecraft, a popular video game created by Swedish game designer Markus (Notch) Persson and published by Mojang, the firm he co-founded with two others. Interestingly, Lego two years ago partnered with Minecraft to roll out digital versions of its toy products including its Star Wars series, The Dungeon and The Iron Golem.

Unlike typical multiplayer video games, Lego Worlds is a one-on-one experience, Robertson noted. Lego’s partner TT Games is optimistic about the possibilities with the game, which allows players to create their own dream worlds with large amounts of content that is generated procedurally, or algorithmically, instead of manually.

“Explore using helicopters, dragons, motorbikes or even gorillas and unlock treasures that enhance your gameplay,” says an announcement for Lego Worlds. “Whether customizing characters, exploring in vehicles, building structures, or discovering an expansive range of items, characters and creatures throughout the worlds, there’s the freedom to create anything imaginable,” said Jonathan Smith, head of production at TT Games in a press release. TT Games and its predecessor firm Giant Interactive have licensed and published Lego games since 2005.

Avoiding Potential Pitfalls

The one-on-one playing experience in Lego Worlds avoids one particularly controversial issue with multiplayer games. “The problem with any kind of multiplayer, online gaming experience is that there is this small but damaged subgroup of people that as soon as you create this environment where you can build things, they immediately try and build the most obscene things possible,” said Robertson.

Robertson said that Lego had faced this problem with an earlier game. A German gaming magazine that reviewed it had built a giant purple phallus right in the middle of the game. “Lego knew about this and expected it,” he added. “They spent an awful lot of time in the development of the game … making sure that that kind of stuff would be caught.” Lego was also worried that it could unwittingly aid pedophiles lurking in a multiplayer environment, because kids could accidentally reveal their address and phone number while playing the game. “What do you do if a kid builds their phone number and address out of Lego on their house?” he asked. “The multiplayer online gaming world is hugely profitable, but hugely dangerous for Lego.”

Why would Lego time a new release for February instead of arriving in time for the holiday rush? Lego cannot make enough of its products and in fact announced earlier this year that it was rationing them, said Robertson. He noted that Lego plans to open a new factory in China next year that would supply its Asian markets. He recalled that The Lego Movie, too, was released in February 2014 and not in time for Christmas.

Branching Out

“Lego is doing what we in innovation say [to do]: Do lots of experiments, and see what works and what does not,” said Robertson. “Lego Worlds is by no means the only strategic initiative that they are taking in this digital area.”

Lego happens to be busy with many non-brick ventures. One is a focus on “digital experiments,” such as an iPad game that allows players to build something, take a picture of it and it shows up in the game, such as in racing a car after building it. Another is Lego Dimensions, an action-adventure video game that TT Games has developed. It also has Lego Clubs made up of adult Lego fans who build objects with Lego bricks. Lego Ambassadors at these clubs have inside access into the company’s creative process and provide feedback that helps in product development. Lego also has theme parks, but instead of running them itself, they are licensed to the British firm Merlin Entertainments.

“Of Lego’s major strategic initiatives, Lego Worlds is the least interesting,” said Robertson. He noted that “parents buy Lego for their kids to get them away from video games.” He predicted that in the next five years, the major non-brick initiative that will drive the most revenue for Lego would be its movies. Lego has announced a sequel to The Lego Movie, and it also has a Lego Batman movie and a Lego Ninjago film based on its popular toy lines.

Lego is also creating “Lego Discovery Centers” or indoor playgrounds in malls by repositioning failed department stores. One is coming up next year at a mall in Plymouth Meeting, Penn., and he expected Lego to also explore that plan at a few recently shuttered Macy’s stores.

“Lego is doing what we in innovation [say to do]: Do lots of experiments, and see what works and what does not.” –David Robertson

Lego Discovery Centers are small play areas where, for example, kids could build cars and race them, but they don’t go very fast and ride on tracks, Robertson explained. Each child must be accompanied by a parent, and likewise, parents cannot enter without their kids, he said. “Parents are just thrilled to have their kids screaming and running around in another room, and they are talking or texting or doing some other work — there’s Wi-Fi of course. There’s a café, and a birthday room, and you don’t have to worry because the kids can’t get out.” On their way out, they pass through a Lego store, which obviously means some retail merchandise sales. The Discovery Centers also draw traffic that brings foot traffic to the other stores at the mall.

Lego’s target market with the Discovery Centers is parents with three- or four-year-old preschoolers, Robertson said. “You’re getting them hooked on Lego; you’re probably selling them a Lego every time they go, and you’re making the parents love Lego. That is likely to be more profitable and more successful long-term than the Lego Worlds video game.”

Changing Business Model

With all its additional product lines based on its toys, one could say Lego is beginning to resemble a media company, said Robertson. In the future, he expects it to compete more against Disney than against Minecraft. Lego’s fundamental business model is also almost like that of a software company, he added. “They pay a buck a pound for ABS plastic, and they sell it to us for 50 bucks a pound.” For the record, Lego toys are priced at upwards of $10 on Walmart.com. Some larger sets sell for $100.

Even as it grows in multiple directions, Lego is still owned by its carpenter-turned-founder Ole Kirk Christiansen and his family, and they retain creative control on all that they source from partner firms. “In the Lego Movie series, Lego insisted that when two characters fell in love, they could hold hands but they couldn’t kiss. That was the Lego rule,” said Robertson.

Technology

Increasingly, technology is making it possible for children to educate each other -- from anywhere in the world -- in a more personal way that can sometimes promote deeper learning than traditional methods offer.